QUESTION 63 (5 marks)
After a rate rise, one group of borrowers pays $600 million more annual interest and reduces consumption by 70% of that amount. A group of deposit holders earns $400 million more and spends 25% of it. Calculate the combined initial consumption change and explain a distributional issue.
Practice marking scheme
Answer
Initial consumption falls by $320 million; borrower and saver effects differ.
Working
Borrowers reduce spending by 600 × 0.70 = $420 million. Deposit holders increase spending by 400 × 0.25 = $100 million. Net change = −420 + 100 = −$320 million. Indebted households face cash-flow pressure while savers receive more income. Different propensities mean gains and losses do not automatically cancel in aggregate demand.
Marking criteria
- Calculates the two group effects. [2 marks]
- Calculates the net $320 million fall. [1 mark]
- Explains unequal incidence and propensities. [2 marks]
Practice question aligned to the current QCAA syllabus; review the worked solution and marking criteria.
View the QCAA syllabusCompare your working with the guide above.